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At
the beginning of this year, leading U.S. officials and Wall Street
"experts" insisted that the subprime mortgage crisis - then in
its beginning stages - was limited to a few, albeit major, subprime
lenders. It was well contained, they argued. In the context of the
overall health of the economy in all other sectors, the pundits of
capitalist stability insisted that there was little or nothing to worry
about.
As
the year draws to a close, that estimate has been shattered by an
astounding series of revelations indicating that the U.S. ruling elite
fear that a major break with the present stability may well be on the
horizon, including a recession of significant proportions. (The word
"depression" is informally banned in bourgeois parlance.)
In
a matter of weeks, as it became clear that the subprime crisis extended
far deeper than originally expected, equally disturbing aspects of the
U.S. economy were factored into the picture. These included the
mushrooming balance of payments crisis, approaching $1 trillion per
year; the unprecedented national debt, approaching $10 trillion; the
growing budget deficit, approaching $1 trillion annually; and the
slowdown in basic manufacturing industries, Also in the picture were
the steadily decreasing profit rates of major corporations, the dismal
job picture, unprecedented oil prices, an ever declining dollar, the
major decline in influence and near bankruptcy of the U.S.-backed World
Bank and the International Monetary Fund, and the slowing down of the
previous motor force of the economy, consumer spending.
These
gave the ruling rich pause to consider that much more was involved than
what was initially seen as a handful of mortgage defaults. And
qualitatively more than a handful there are. Some two million mortgage
foreclosures are now expected in the coming year. The leading U.S. banks and brokerage
houses are in the early stages of writing off hundreds of billions of
dollars in bad debts. The top officials at Morgan Stanley and Merrill
Lynch have been forced to resign their posts in disgrace.
Little
more than a year earlier these same banking executives, direct
representatives of the ruling-class families that run the country, were
celebrating their largest profits in history. Wall Street was exploding
in joy, with their elite coterie of top business professionals granting
themselves multi-million-dollar and billion-dollar Christmas bonuses
while touting their financial wizardry.
The
chief executive of the world's largest bank, Citigroup, Charles O.
Prince, was fired in October after Citigroup's credit ratings dropped
dramatically following a $30 billion shortfall that will require this
banking behemoth to sell off assets or cancel dividends to pay its
debts. Similarly, the chairman and chief executive of Merrill Lynch, E.
Stanley O'Neil, was forced to resign after the corporation announced
the worst losses in the company's history.
The
announcement of the multi-billion-dollar losses, still the tip of the
iceberg, was followed by major declines in stock market share values.
The resulting lowering of their credit ratings served to limit their
borrowing capacity, furthering exacerbating the
crisis.
U.S.
financial institutions in the recent period have accounted for about
half of the growth in the U.S. economy. But this stupendous growth in
what Marx called "fictitious capital" was a product of Wall
Street's utilization of endless and complex financial instruments and
manipulations that had nothing to do with gains in the major
manufacturing sectors of the economy, where real surplus value is
created. Today, in the face of unprecedented globalized capitalist
competition, these sectors are in decline, with some of the most
powerful corporations, as with the U.S. auto industry, threatening
bankruptcy.
Today,
the billions gained on the ledgers of the leading capitalist banking
institutions are
evaporating.
Black is turning into red on increasing numbers of corporate balance
sheets, from financial institutions to leading manufacturers.
The
financial boom was based in significant part on banks, using borrowed
or deposited "cheap" money obtained at low interest rates,
then charging high fees and issuing bonds with higher rates of return
on packages of debt based on questionable loans such as subprime
mortgages. Profit-hungry corporate investors in the U.S. and worldwide,
assured that their investments were safe, if not guaranteed, eagerly
bought in to what became today's subprime mortgage crisis.
The
banks and related institutions secured hefty profits for their
services. They did the same with auto and credit card loans, based on
the flawed assumption that the consumer-spending boom, driven by
massively inflated housing values, would continue forever.
The
Federal Reserve Board's September 2007 decision to lower short-term
borrowing rates by banks a half point to 4.5 percent, followed by
another quarter point in October, was greeted with cheers on Wall Street,
at least for a day or so, after which the stock market resumed its
downward plunge. After the Fed further reduced rates on Dec. 11, to
4.25 percent, the stock market plunged 294 points - an indication that
the problems faced by Wall Street bankers were far greater than the
need for another government shot in the arm. Bankers fully understand that "borrowing" money
from the federal government directly serves their interests. Next to
direct tax cuts and other outright subsidies to the rich, it's the closest
thing to free money there is.
The
concept is simple. Bankers borrow government funds at a low interest
rate and loan it out to everyone else, from subprime borrowers to
corporations or speculators, at a higher rate or fee for their
services. The difference is pocketed by the ruling-class banking
institutions, which use the profits to further invest in additional
schemes, each designed to sell bonds or stocks or other financial
instruments at more profitable rates. The process is repeated, pyramid
style, with speculators and banks betting that it will continue
indefinitely.
Structured
Investment Vehicles (SIVs) and the similar Collateralized Debt
Obligations (CODs) have figured prominently in this modern-day super
speculation.
These
are created by banks and other financial institutions that purchase
pools of thousands of mortgages and other securities and pay for them
at low interest rates and in turn sell them at much higher rates of
return. An estimated $400 billion has been invested in such vehicles, a
great portion of which is today at risk as the value of the pools of
mortgages decline in step with mortgage foreclosures.
The
$400 billion figure is but the latest estimate of how much subprime
mortgage money is at risk. No one really knows the real figures.
Benjamin Bernanke, the new Federal Reserve Board chair, stated
recently, "I'd like to know what those damn things are
worth."
But
some figures are helpful in determining this magnitude. Subprime
adjustable rate mortgages, according to New York Times experts,
represent about 10 percent of the $10 trillion in outstanding
mortgages. By this estimate holders of these debts are at risk to the
tune of $1 trillion.
Additionally,
this estimate leaves out those risks stemming from defaults in more
standard mortgage vehicles that most workers hold. These too may lead
to additional trillions in loses for ruling-class financial
institutions, as lending institutions are expected to raise adjustable
mortgage rates on 2 million homes in the next 18 months. This can only
lead to additional foreclosures.
Workers
lose trillions in real estate value
This
leads us to still another side to this crisis, one that directly
affects working people qualitatively more than the corporate elite. The
Oct. 25 New York Times reports, "The much bigger loses will be in
declining real estate prices. Household real estate wealth - the equity
people own in their homes, rather than what they owe lenders -
currently totals $20 trillion, according to the Federal Reserve."
Losses to working people in real estate value, according to the same
article, could be between $2 trillion and $4 trillion.
Charles
Schummer, chair of the Joint Economic Committee of Congress, noted,
"From New York to California, we are headed for billions in lost
wealth, property values and tax revenues." Change billions to
trillions and Schummer's figures are in the ballpark. Global Insight, a research firm,
predicts that "housing prices will drop 5 percent over the next
year and 10 percent before mid-2009 for a total loss of about $2
trillion." Goldman Sachs predicts that prices will drop 15 percent
for an overall loss of $3 trillion in real estate value. Other
forecasters put the figure at 20 percent or more, thus accounting for a
$4 trillion loss to working people. And the crisis has just begun!
Home
sales fell to the lowest annual pace in almost a decade, an indication
that people are more than nervous about buying or selling. Inventories
of unsold homes reached their highest levels in 20 years. All kinds of government schemes are
under consideration to avoid a full-scale panic, especially schemes to
assist banking and related financial institutions. The latter are
hesitant to declare or write down losses based on the bad loans they
are still holding on their books, that is, high-risk loans that are
more and more likely not to be repaid.
Government
officials in a quandary
Treasury
Department head Henry M. Paulson suggested a plan to have banks raise $75
billion to stabilize global credit markets. Paulson's idea is for the
banks to issue new stocks or bonds based on supposedly good loans they
hold and to have these purchased by banks in better condition.
The
money raised by the banks in jeopardy would be used to support their
bad bonds in order to avoid default and/or having them dumped on the
market at fire sale prices and great losses. This essentially amounts
to an accounting sleight of hand to avoid declaring losses now in the
hope that a future economic turnaround will elevate the value of the
bad loans.
While
both Paulson and Bernanke insist that the government will not bail out
bad loans to save ruling-class banking institutions, it is well known
that there is more than one way to skin a cat. The 1990s Savings and
Loan scandal that saw a government bailout to the tune of $240 billion
- big money in those days - is evidence enough that the ruling rich
will try to protect their interests as best they can.
The
S&L scandal, ending with the imprisonment of a few leading
capitalist crooks, like former U.S. Senator Alan Cranston, included the
outright theft by bankers across the country of one-third of the
"losses," or some $80 billion. These were never repaid.
The
2002-2003 stock market crash, which included financial scandals
involving some of the world's leading corporations like Enron, World
Com, and many others that remain hidden to this day, saw $7 trillion,
or 40 percent of stock market value, evaporate - and along with it the
pensions and jobs of tens of thousands of workers.
Liquidity
crisis
The
present frenzy and then crash of subprime mortgage markets threatened a
"liquidity" crisis, a shortage of cash to meet the demands of
those who wanted out of a crumbling market. The potential for massive
runs on banks, demands for redemption in cash, have led to similar
crises in England, where the central bank was compelled to bail out a
number of private banks where no cash was available.
The
Federal Reserve Board has issued stern warnings that bank runs in the
U.S. could lead to major financial dislocations. The origin of the
liquidity crises is the fact that super-confident bankers, believing
that their money-making schemes were flawless, literally re-invested - again,
pyramid style - almost every cent they earned in order to keep the
money-making machine rolling at full speed. Any thought of a need to
keep some cash on hand in the event of a glitch in their system was
brushed aside in the face of the imagined immutable golden future
immediately ahead.
Prior
to the recent turmoil, which saw bank profits decline at the fastest
rate in modern times, 30 percent or more in major banks, the ruling
rich thought they had perfected the art of speculation to a science.
Many bragged that that they had developed for investors a foolproof
system wherein their bonds and other offerings were essentially
guaranteed against losses.
Of
course, these guarantees, like all others, have value only when there
is money in the bank. When there is a run associated with a major
crisis, as is developing today, their value is limited. Lawsuits
against banks that presently seek to avoid meeting their
"guarantee" obligations are currently in progress.
Financial
speculation has perhaps reached its zenith in the hedge-fund market,
where top executives were proclaimed geniuses when they touted
investment gains of 40 percent.
Hedge funds are essentially non-regulated, privately offered and
managed pools of capital for wealthy, "financially sophisticated"
investors.
One
New York Times analyst jokingly suggested that if hedge-fund experts
could manipulate money at a 40 percent profit rate, perhaps the
government should lend them $9.6 trillion, the approximate amount of
the U.S. national debt, the largest in world history. At a 40 percent
rate of return, the debt could be paid in full in less than three
years. "Let's do the same with the failing Social Security
system," he suggested, knowing that the idea was preposterous but
nevertheless practiced with little restraint on Wall Street.
"The
party is over"
This
sophisticated jokester's point was that Wall Street speculation and
pyramid-style investments that result in unprecedented profits may well
have come to an end. The jig is up, or as a Nov. 7 AP story noted,
"The party is over."
The
article begins, "The malaise in the mortgage market is starting to
spread to credit cards and auto loans in what one analyst has dubbed
consumer credit contagion. It's an ominous warning signal for the
economy." The story reports unprecedented losses by leading
lenders, as we have mentioned above.
A
few years ago, a Socialist Action report noted that consumer spending
exceeded income by some 0.3 percent, the difference being made up by
credit. Workers spend more than they earn, we noted, not because they
are foolish but rather to make ends meet. Today the negative spending
figure is 2.4 percent, that is, each year, on average, American
families spend 2.4 percent more than is earned; the difference is made
up by credit, made available in large part because of the availability
of home equity loans.
Alan
Greenspan himself warned a number of years ago about what he termed the
"wealth effect" - the dangerous notion that living on credit
was fine because of inflated home values.
Today
the housing market is in rapid decline. New construction is down 31
percent. Sales of existing homes have dropped 30 percent since the peak
in 2005, and the supply of unsold homes in October 2007 reached a
19-year high. The housing bubble has burst, with no one able to predict
how low home values will sink.
Consumer
spending accounts for 70 percent of all economic activity in the U.S.
In the face of falling housing values, tighter credit, increased energy
costs, lose of jobs, wage cuts, cuts in health-care coverage and
pensions, this critical aspect of economic life, one that underlies the
financial stability of the U.S. itself, and indeed the world economy,
has slowed.
In
the construction industry alone 383,000 jobs have been lost, with more
to come. Tens of thousands of decent-paying jobs have been lost in auto
and steel and in almost every other manufacturing industry.
We
have repeatedly noted that the government's official “unemployment”
figures are of little or no value, as it defines the term solely with
respect to the number of individuals who receive unemployment
insurance. The vast numbers who are not eligible for this coverage, who
have exhausted it, or who work low-paying part-time jobs are not included.
One
fact is certain. Each year some one million decent-paying jobs are
lost, usually exported to low-wage nations like China, where the labor
costs are a fraction of those paid in the U.S.
An
added quirk to the employment picture comes from the top end of the pay
scale. Financial services firms in New York have announced layoffs of
42,404 this year, according to the Oct. 23 New York Times: "Those
cutbacks are especially threatening to the local economy because pay on
Wall Street is so high that the industry accounts for one out of every
five dollars of income in the region. Economists estimate that each new
job on Wall Street leads to at least 1.3 other jobs, so for every three
investment bankers laid off four other workers are in jeopardy."
The
inevitable result of the massive attacks on working people on every
front is that they have less and less to spend. The contradictions
inherent in capitalism are more rapidly approaching a breaking point,
as the crisis of overproduction - driven by ferocious and never-ending
competition for declining world markets - results in an excess of
commodities being produced worldwide.
In
the face of lightning-fast technological innovations, virtually new
plants stand idle or close when profit rates decline and eventually
fall to zero or less. The lay-offs that result from plant closures
inevitably bring on the inseparable crisis of under-consumption.
We
live in a world where the most sophisticated and refined means of
production in history exist and are capable of producing more than
enough for everyone. But under
the laws of the capitalist system, this very fact spells doom for ever
larger proportions of the world's population. The inevitable decline in
consumer spending pose a threat to the system's stability not seen in
half a century. For the first time in decades all major department
stores report huge declines in sales, with the stock market values of
each store also showing huge declines.
The
decline in home equity loan or credit-generated consumer spending is
but one side of the equation accounting for the unprecedented mortgage
foreclosures. To this we should add the impact of an annual
trillion-dollar transfer of wealth from 120 million U.S. families, that
is, the working class in general, to the super rich, through
trillion-dollar tax cuts for the corporate elite, and tax increases,
and assaults on pensions, health care, and wages for the rest of us.
The
result is a mounting crisis of major proportions for working people in
general and for a capitalist system today choking on its inherent
contradictions, the latter including the absolute need to solve its
inherent contradictions at the expense of the working class in the U.S.
and worldwide.
The
historic gains won in struggle by the U.S. working class and workers
everywhere have been eroded by non-stop ruling-class attacks on every
front, with the greatest blows being struck in the most recent decades.
Whatever buffers in the system that have slowed this process - such as
two-person and now 2.3-person incomes in each family, or home equity
and the associated access to credit - are today less and less
sufficient to hold back the mounting tide of anger that has thus far
been largely restrained.
This
restraint has a dual character. On the one hand, it is a product of the
view that things will change, that the economy will turn around and
that the previous good days will return.
Yet
a diminishing number of workers today believe that this is what the
future holds. They more and more understand that the factors at work
that undermine their basic security go to the core of the system
itself.
Plant
closures, outsourcing of jobs, pension elimination, and all the rest
are a reality that requires a qualitatively greater fightback than has
been mounted in their lifetimes. It requires a level of unity and
combativity that they have never experienced.
Today,
the need for such unity is just beginning to percolate through the
consciousness of U.S. workers.
In the case of their French counterparts, who have become
accustomed to massive, united, and coordinated strikes to defend their
elementary class interests, the process is more advanced.
But
as Karl Marx said a long while ago, “Capitalism creates its own
gravediggers." Without doubt
American workers are far from immune to the massive forces operating to
deprive them of gains that have been wrested from the boss class over
decades of struggle.
The
time is fast approaching when the present molecular process of
evaluating class struggle options breaks through to a visible fightback
that will shake the foundations of the system itself. The capacity of
revolutionary socialists to win the best fighters today and assemble a
broad class-struggle left wing in the labor and social movements will
prove critical to winning the first round of victories that open the
door to the inevitable massive fightback ahead.
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